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Magnum Hunter Resources Corp. is planning to build production through the rest of this year from its substantial asset base in the Appalachian Basin after being knocked back early this year from a lack of pipeline capacity for natural gas liquids (NGL), CEO Gary Evans said last week.

If enough pipeline capacity had been available, total year/year volumes would have jumped by 34%, he said during a conference call to discuss 1Q2013 performance. Magnum had to delay reporting its results because of staffing issues, which since have been addressed, he said.

"We intend to refocus our time and efforts on growing our production from our substantial asset base with our current drilling plans. Actual production for this first quarter was substantially impacted by shut-ins necessary in our Appalachian Division due to midstream gathering issues.

"While the problem was troublesome and required additional pigging launchers to be installed due to heavy NGL and liquids production found in our new Marcellus wells current gas stream, this is a good problem in that this should prove beneficial over time with greater overall liquids production."

The midstream issues led subsidiary Eureka Hunter Pipeline "to re-engineer a portion of its gathering lines," Evan said. Once Eureka had completed that project, "production was further delayed due to requirements for new air permits and lengthy delays in obtaining such permits" from West Virginia regulators. Magnum is planning to put its Eureka up for sale in September, which could fetch as much as $1 billion.

In all, the shuttered production cut 3,120 boe/d from 1Q2013 volumes, he said. Without the shut-ins, output would have been about 16,889 boe/d. All of the gas and NGLs now are being processed at the Mobley facility in Wetzel County, WV (see related story).

The Mobley complex, operated by MarkWest Energy Partners LP, was at 60% of capacity just a few weeks after it was completed last December, CEO Frank Semple said in May (see NGI, May 13). A second plant ramped up in February brought capacity to 320 MMcf/d, and within three months it was processing more than 215 MMcf/d. A third plant is to be constructed, with capacity by the end of the year estimated at 520 MMcf/d.

Magnum's oil versus gas mix is much oilier than it was a year ago, all on a shift in capital spending from natural gas. Magnum now is producing more than 60% liquids, versus 35% a year earlier. Operationally, the company also appears to be firing on all cylinders. Last month the horizontal section of Magnum's first Utica multi-well facility on the Farley pad in Washington County, OH, was completed; fracture (frack) stimulation is scheduled later this month (see NGI, July 8).

In North Dakota's Williston Basin, 19 gross (5.5 net) wells were ramped up by the end of June, with eight fracked and awaiting flowback, 11 drilled and awaiting completion and four new wells underway. Oneok Partners LP has a gas conservation and gathering project that already has in place a compression station, high-pressure 12-inch diameter discharge line and more than two of the four east-west gathering lines in Phase 1.

However, "abnormally high rainfall amounts during the second quarter causing production curtailment," Evans said. "The system started to move natural gas volumes for the first time during the last week of June. This major conservation effort will tie in approximately 300 wells over the ensuing year."

Work also is accelerating in the Middle Bakken across the Ambrose block. Thirteen test wells are producing, eight laterals are awaiting completion and two multi-well "eco-pads" are drilling. Subsidiary Williston Hunter also is working the Tableland Field in Canada in conjunction with the North Dakota operations. Oneok wants to connect Tableland gas to its system in North Dakota; permit applications have been submitted to Canada's National Energy Board and the Federal Energy Regulatory Commission.

Most of its Eagle Ford acreage in South Texas was sold earlier this year to Penn Virginia, but subsidiary Shale Hunter LLC still owns 7,000 net acres in Fayette, Lee and Atascosa counties, including close to 5,100 prospective for a combination Pearsall/Eagle Ford shale play. The Pearsall is about 2,500 feet beneath the Eagle Ford at depths of 9,000-12,000 feet and about 300-400 feet in thickness.

"This combo Pearsall/Eagle Ford area has always been of interest to our team," said Shale Hunter President H.C. "Kip" Ferguson. "The right depth, gas-to-oil ratio, and completion style will be required to optimize the potential for these formations.

"The Pearsall Shale is different in composition to the Eagle Ford Shale. It is composed of more silica with interbedded organic shale and limestone. We believe that our Pearsall Shale acreage is located within the wet gas to rich condensate window of the play, which is ideally located between the Charlotte fault trend eight miles to the north and the Karnes fault trend to the south..."

Magnum (MHR) "has been toiling in the Marcellus wet gas play for a while," said Wunderlich Securities Inc. analyst Irene O. Haas. "The focus now is to divest more noncore assets, raise cash and call the perpetual preferred shares, starting with Series C this year." It then "can focus on operations once more, with big wells expected from the Marcellus at year-end. If the Utica wells are successful, there could be more upside to MHR's production growth profile."

Canaccord Genuity's Stephen Berman and Chris Mandeville said given that production now is "running north of 17,000 boe/d and the company is bringing on a substantial number of high working interest wells" in the second half of this year, "we continue to believe that MHR will meet and/or exceed guidance of a 23,000-25,000 boe/d exit rate for the year, particularly when you consider that this does not include any contribution from its planned Utica wells."

The Eureka Hunter system, which is 58% owned by Magnum, now spans 79 miles and flows 110 MMcf/d (50-60% third-party) through its pipelines, the Canaccord duo noted. "This should approach 200 MMcf/d by year-end, as the company continues to tie in additional Marcellus wells...We currently do not expect any Utica wells to be tied in during 2013; however, the company may look for a temporary solution to bring online its well on the Farley pad via a line in to a major trunkline and/or install a dehydration or small cryogenic unit."

The big jump in revenues came from acquisitions and a stronger focus on NGL production. However, the growth came at a cost. Because of its understaffed auditing department, more personnel and professional services had to be added, which increased costs and reduced profits.

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